Carbonpricesinnationaldeepdecarbonizationpathways
InsightsfromtheDeepDecarbonizationpathwaysProject(DDPP)
1.TheDeepDecarbonizationPathwaysProject(DDPP)
1.1TheDDPPapproach
This note discusses the lessons learnt from the Deep Decarbonization Pathways Project
(DDPP) on 2°C-compatible transformations to 2050 built on an analysis of national-scale
scenarios to 2050 developed by country partners from 16 countries representing 74% of
2010globalemissions.1
The DDPP approach is explicitly and inherently consistent with the bottom-up framing of
climate talks as defined by the Paris Agreement, that is to say grounded in national selfdeterminationofmitigationobjectivesandimplementationofmeasurestoreachthem(Art.
4.2),whilecumulativelyconsistentwiththeglobalgoals(Art2).Theapproachisframedby
twofundamentalmethodologicalprinciples(DDPPNetwork,2016).
Ontheonehand,themitigationambitionadoptedbyeachcountryisnotimposedex-ante
from burden-sharing allocation or cost optimization, but instead results from the selfselection by each country team of its own emission pathway, in a way that is compatible
with domestic socio-economic and physical circumstances. To ensure consistency with
climatemitigationrequirements,countryscenarioswereguidedby“downwardattractors”,
notably the goal of keeping temperature below 2 °C and associated emissions intensity
milestonerangesby2050.
On the other hand, a common reporting template ensured a detailed and transparent
representation of regional and sectoral transformations at different time horizons in each
scenario. This “DDPP dashboard” makes explicit the physical changes required by the
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Australia,Brazil,Canada,China,France,Germany,India,Indonesia,Italy,Japan,Mexico,Russia,SouthAfrica,
SouthKorea,UK,USA
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domestic low-emission pathways, in a way suited to inform concrete long term transition
plans,includingunavoidablechangesandkeyshort-termprioritiesneededtomeetthelongterm objectives when considering infrastructure lock-in, capital stock inertia and frictions
affectingtheadjustmentoftechnicalandsocio-economicsystems.
1.2TheDDPPresults
Usingthesetwokeyprinciples,theDDPPscenariosprovideatangiblevisionofthenational
andsectoraltransformations,whiletakingintoaccountthespecificsofthecontextsinwhich
theyapply,allwiththepurposeofinformingpolicydesigntoimplementthem(Batailleetal,
2016).DDPPwasabletomakefindingsontheglobalscale,basedon16detailedstudiesand
assumptionsaboutthe‘restoftheworld’;theglobalpictureisa‘composite’ratherthana
singlemodelrun.
Thecross-cuttingresultsoftheDDPParesummarizedintheexecutivesummaryofthe2015
report(DDPP,2015a),anddescribedindetailthe2015synthesisreport(DDPP,2015b).The
country-by-countryconclusionsaredetailedinthecountryreports2
Themainconclusionsare:
•
It is feasible in all the countries we have studied to design truly transformative
scenarios, consistent with domestic, country-specific socio-economic priorities, that
achievedeepdecarbonizationoftheenergysystem.
•
When aggregated and extrapolated with assumptions about the emissions not
explicitly covered (energy emissions outside the 16 countries and non-energy CO2
emissions), global cumulative CO2 emissions over 2010-2050 corresponding to the
scenarios defined under the DDPP are estimated to range between 1185 Gt and
1555Gt. This falls within the range of 2010-2050 cumulative emissions consistent
withan“aboutaslikelyasnot”likelihoodofstayingbelowthe2°ClimitinIPCC2014
(1166 Gt – 1566 Gt). This means that emission reductions to 2050 achieve under
DDPPareinlinewitha50%likelihoodofstayingbelowthe2°C
•
In all national scenarios, the deep decarbonization of energy systems requires
strong action on three pillars of decarbonization: i) energy efficiency and
2
http://deepdecarbonization.org/countries/
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conservation, ii) decarbonization of energy carriers (electricity and fuels), iii) fuel
switching towards low-carbon energy carriers in end-use sectors. Land use
managementanddirectCO2capturewillalsobeimportantforsomecountriesand
has been considered as an explicit fourth pillar in countries where it plays a major
role.
•
The technologies, strategies and sequences considered to operationalize the three
pillars vary from one country to the other, according to the specifics of national
circumstances.
•
It is possible to simultaneously meet country-specific socio-economic aspirations
andtransitiontoalowcarboneconomyinbothdevelopinganddevelopedcountries;
weinviteyoutoseetheexamplesofSouthAfricainAltierietal(2016)andJapanin
Oshiroetal(2016).
•
Several pathwayscouldbedefinedineachcountry,whichareallconsistentwithambitious
long-term deep decarbonization but follow different routes, according to the main
uncertaintiesaffectingthespecificsofindividualcountrytransformations.Thewidelyvarying
natureoftheselongtermvisionsisnecessarytosupportrobustsequentialdecision-making
that takes place under short term political horizons and high uncertainty, building on
progressive arrival of information. This decision making would support the design and
implementation of policies that trigger ambitious early emission reductions while inducing
innovation and preserving long term options. This “adaptive management” approach is
discussedmoreindepthontheexampleofFranceandGermanyin(Mathyetal,2016).
•
Global low-carbon investment flows for three key sectors (power generation, passenger
transport and liquid fuel production) have been distilled from the set of national DDPP
scenarios. This evaluation gives low-carbon investment needs in these three sectors of
around 1.2-1.3% of GDP in 2050 if global economies of cooperation on technology are
achieved(costsdoublewithoutcooperation).
•
Inthecaseofcarbon-intensivegoods(e.g.iron&steel,andcement),thereconstructionof
globaltrendsfromnational-scaleDDPPscenariosshowsthatthenationalDDPPscenariosare
consistentwithconventionalproductionestimatesandareclosetotheproductionpossibility
frontier(Denis-Ryanetal,2016).ThispointstotheneedforcoordinatedinternationalR&D
and trade policies in these key sectors in absence of a massive breakthrough of material
uses.Inalessoptimisticsituationwheretheefficiencyofproductionisnotatthefrontier,a
strongeractionwouldrequiredonthematerialdemandside.
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2-InsightsfromtheDDPPoncarbonprices
A key methodological point of the DDPP is the accommodation of different modelling
paradigms supporting national decarbonization studies in different countries, ranging from
sophisticated combinations of macroeconomic, technology stock turnover and land use
modelstosimplespreadsheets(Pye&Bataille,2016).Thiswiderangeofanalyticalmethods
allows derivation of insights on carbon prices from the set of national DDPP studies,
includingfindingsinrelationtoaglobalcomposite,togetherwiththerichnessandspecificity
ofunderstandingof16majoreconomies.
2.1–Shadowcarbonprices
TheDDPPteamsworkedwithmodelsdifferentinnatureandtheirnumericalfindingsmay
havedifferentinterpretation.Howevertheyhaveincommontogivetrajectoriesof‘shadow
carbon prices’ which underpin the considered decarbonisation policies consistent with a
normativeemissiontarget.Thesepricesprovideameasureofthesocialvalueattributedto
mitigationactionsateachpointintime.Itcanbeexpressedintermsofthepricesignalthat
wouldbenecessaryandsufficienttoincentivizerationalchoicesbyeconomicagentstocurb
carbonemissionsaccordingtotheobjectiveandhenceavoidthesefuturecosts.
TwomaingeneralconclusionscanbederivedfromexamplesintheDDPPscenarios:
a) To make long-term decarbonization happen, a rapid increase in the signal on the
shadowcostofcarbontoemittingfirmsandhouseholdsisneededintheshort-term.This
priceincreaseisfasterthanthetrendsobtainedwhenassumingintertemporaloptimization
andflexibleadjustmentslikeinmanyIntegratedAssessmentmodels,becauseastrongshortterm price signal is required to provide early incentives to ensure the requisite innovation
and investment in mitigation, including long-lived infrastructure and R&D which will only
bear their necessary fruit in the longer term. As decarbonization objectives become more
stringent,theincentives(asreflectedbyacarbonvalue)willneedtoincreaseovertime,but
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ataslowerpacethanintheshort-term.ThethreescenariosoftheUKDDPPstudyillustrate
thisconclusion(see(Pyeetal,2015)formorein-depthpresentationanddiscussionofthe
UK scenarios). All scenarios feature a similar trend for the carbon value, although with
ranges according to the assumptions. The modelled estimates of carbon prices required
underthescenarioshighlighttheincreasingchallengeofthe4thcarbonbudget,shownby
the increase between 2020 and 2025. The continued increase under M-VEC to 2030
indicates delayed and lower uptake of key mitigation technologies in the power sector,
namelynuclearandCCS.R-DEMisconsistentlylowerthanD-EXPduetothehigherefficiency
gains, and lower demand observed under this scenario. By 2045, estimates are between
£270-370/tCO2, up from £150 – 250/tCO2 observed in 2025. The results for 2050 are not
plotted but indicate an extremely challenging situation (>£1000/tCO2), driven by residual
emissionsthataredifficulttomitigate.
b) The need for high and rising carbon prices is also valid in national modeling for
developing countries, but the value appears lower in absolute terms in these countries
than analysis of developed countries. Two structural explanations can be put forward for
this difference. On the one hand, under the institutional and policy context of developing
countries, where markets are incomplete because of a strong role of informal exchanges,
instabilityofinstitutionsandfastevolvinginfrastructuresaffectingtheaccesstoinformation
and visibility at different time horizons, economic signals may be swamped in a myriad of
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contradictory signals and incentives and the carbon price signal cannot be, at least in a
transitionperiod,atthecoreofthedecarbonization.
Ontheotherhand,theselowernominalvalueshaveastrongeffectintriggeringbifurcations
in the domestic economies. Indeed, the carbon price level is not sufficient to measure its
impact,whichinsteaddependsontheeffectofhigherenergypricesinthespecificcontextof
the economy considered. A rise of energy process affects proportionally more the
developing economies, because price-elasticities are higher at lower income and because
theseeconomieshaveahigherratiooftheenergytolabourcost(whichisthecoredriverof
generalequilibriumeffectsofhighercostsofenergy(Waismanetal,2012)).
ThisisillustratedbytheSouthAfricanandBrazilianscenariosdevelopedunderDDPP.Both
scenariosachieveambitiousdecarbonization,asmeasuredbya80%decreaseoftheratioof
carbon emissions to GDP between 2010 and 2050 in both cases. But this is achieved with
lowerrangesofabsolutecarbonpricescomparedtothosereachedindevelopedcountries.
Both studies use national models, the COPPE team analysing an explicit carbon price, the
ERC team an implicit carbon price. In both studies, the socio-economic implications of
mitigation are considered highly policy-relevant. The difference between South African
scenarios and Brazilian scenarios, the latter showing higher values of carbon price for a
comparabledecarbonization,canbeexplainedbytwomainreasons(see(Altieriatal,2015)
togetherwith(Merven,Moyo,Stone,Dane&Winkler2014);and(LaRovereetal,2015)for
morein-depthpresentationoftheSouthAfricanandBraziliananalyses,respectively).Onthe
one hand, the nature of the transformations is different, given different country
circumstances.Massivedecarbonizationofelectricity,whichcanhappenevenatmoderate
carbonprices,isthecoreofthetechnicaltransformationinSouthAfrica,givenacoal-based
energy economy. In the Brazilian analysis, whereas renewable biomass both from forestry
andmodernfirstandsecondgenerationliquidbiofuels,energyefficiencyandelectrification
aremoreintense,wheretheresourceendowmentofhydroandmorerecentlywindpower
has led to a relatively low-emissions grid historically that may be continued in the future
complemented by the development of solar and biomass. Second, the nature of the
strategies themselves is different; while in the Brazilian case mitigation actions are
essentiallytriggeredbycarbonpricesinthecontextofabroadermitigationpolicypackage,
the South African scenario considers a set of structural transformations that support the
decarbonizationprocessbutarenotessentiallytriggeredbycarbonprices.Inthislattercase,
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relatively low carbon prices are sufficient to reach the 80% decoupling of emissions. This
suggests that the economic and policy context in which the carbon price applies is a key
driverofpricelevelscompatiblewithagivenmitigationobjective.
An explicit example is provided by another study conducted by the ERC team (Merven,
Moyo,Stone,Dane&Winkler2014),whichcomparedtheresultsofimplicitcarbonpricedue
toaRenewableEnergyprogrammetoacarbontax,usingthetaxrateinthepolicydesignby
NationalTreasury.Inthisstudy,treasury’sproposedtaxrates(NationalTreasury2013)are
approximated by a CO2 tax runs starting at $5 (R48)/ ton CO2) in 2016, increasing to
$12(R120)/tonCO2in2025.Figure5showsacomparisonoftheemissionsresultingfrom
explicit and implicit carbon pricing in the power sector under different renewables energy
programs.
InBrazil,eventhoughawidespectrumandhighabatementpotentialoflowcostmitigation
options are available, higher carbon prices are not sufficient to overcome the barriers of
insufficient domestic savings and financial sector imperfections. Carbon pricing is seen as
part of a broader mitigation policy to de-risk low-carbon investments and make them
attractivetopublic-privatepartnerships.Therightregulatoryframeworkisrequiredtofoster
innovation and grow the market share of low carbon technologies enabling to redirect
financialflowstowardsthem.
Thenextsectiondiscussesthismorein-depthontwootherexamples.
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2.2–Carbonprices,asinstrumentsofapolicypackage
Incontrasttotheunderlyingeconomywide,equimarginalcarbonshadowvalueneededto
reach a given target, trajectories of explicit carbon prices (i.e., the pricing instrument
concretelyintroducedinthenationaltaxsystemandactuallypaidbyfirmsandhouseholds)
areobtainedusingmodelswithahighlevelofgranularitysuitedtorepresentthedetailsof
thesocio-economicsystem.Thiscanbethoughtofasanimplicitcarbonprice,resultingfrom
national models even if they do not model carbon pricing instruments (taxes or ETS), but
other policies. In these policy orientated models, the evolution of the economy in a low
emissionpathwaysdependsontheinterplaybetweenend-usedemand,energyprices,the
carbonpricestringencyandsectorcoverage,recyclingmethodsandnon-priceinstruments
(e.g.technologyefficiencyorGHGintensityregulations).
TwomainconclusionscanbederivedfromtheDDPPstudiesinthisregard
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a) The explicit carbon price needed depends upon the combination and interaction with
otheractionsandmeasuresinthenational“policypackage”
Thesameemissionreductionscanbereachedwithlowcarbonprices,iflessprice-sensitive
sectors are addressed by targeted policies. While carbon pricing is essential, especially for
directing innovation towards GHG mitigation, it may prove politically impossible or
practicallyinfeasibletoraisepriceshighorfastenoughforsomesectors(e.g.personaland
freight transport, residential and commercial buildings). For these sectors, performance
based, potentially tradable GHG intensity regulations that closely mimic the efficiency and
effectiveness of carbon pricing may be necessary. Other sectors, like iron and steel, while
sensitive to carbon pricing, are very exposed to trade pressures and potential carbon
leakage. They may instead require regionally and sectorally specific policy mechanisms to
maintainpoliticalbuy-inandthepressuretoinnovateandinvestinthecleanesttechnology
possible. This may involve conditional exemptions or free emissions permits that require
stronginnovation,orcreativerecyclingsystemsthathavethesameeffect(e.g.capandtrade
with output based recycling). Finally, some sectors, like land use and diffuse methane
fugitives,maybeimpossibletopriceandwillrequiresomeformofregulation.Asdiscussed
moreindepthin(Batailleetal.,2015),theCanadianteamforone,tomaximizelongterm
political acceptability, used a combination of: economy wide carbon pricing starting at
$10/tonneCO2e(CAD2015)andrising$10peryearsteadilythroughtime,recycledequally
tocorporateandincometaxes;sectorspecificperformancebasedregulationsfornewand
retrofit transport and buildings falling to net zero emissions by 2025-2040; an intensity
based, tradable performance standard falling to -90% by 2050 for large emitters using
outputbasedallocations;andmethaneandlanduseregulationstoachieveitsDDPPtarget
atthelowestpossiblecarbon“stickerprice”.Thebelowfigurecomparescarbonpricelevels
neededtoreachbelow2tCO2percapitain2050undertheabovedescribedpolicypackage(
350real$2015CAD/tCO2in2050),vsthecarbonpricesneededtoreachthesameemission
levelsinabsenceoftheaboveregulations(around700real$2015CAD/tCO2in2050)
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b) Articulating the climate goal with other sustainable development targets allows
achievementofthesameclimateobjectivewithalowercarbonpriceandeconomicgains
comparedtoaclimate-centricapproach.
A climate-centric perspective focused on the carbon price as the only driver of
transformation fails to capture the broad set of potential complementarities between the
climateandothersustainabledevelopmentobjectives.Integratingthethinkingaboutcarbon
prices with a broader perspective of the integrated social, economic and environmental
value of mitigation action (SVMA) recommended by the article 108 of the Paris decision,
shows the extent to which land use policies, transport infrastructure and urbanplanning,
lawsanddevelopment,buildingcodes,education,technologysubstitution,andinvestment
flows can deliver the same level of cumulative carbon emissions at much lower carbon
“stickerprice”.
TheIndianDDPPteamimplementedtwoscenariossubjecttothesamecarbonbudget(see
(Shukla et al, 2015)); a solely climate focused “Conventional Scenario” and a “Sustainable
Scenario”metincombinationwithothersustainabledevelopmentgoals.Thetoplineinthe
figurebelowisaglobalcarbonpriceintroducedexogenouslyinthe‘ConventionalScenario’
andtakenfromcarbonpricelevelsobtainedforIndiaina‘2oC’scenariofromanIAMstudy.
Thesustainablescenarioalsoconsidersadditionalmeasurestargetingnon-carbonemissions
indicators (local pollution, energy security, urban planning, decentralized energy for rural
areas etc., water management) which were driven by stronger demand-side push,
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behavioralchange,andinfrastructurepushmeasurescomparedtousingthecarbonpriceas
thesoleinstrument.Theanalysisofthescenarioshowninthefigurebelowshowsthatthe
carbon price needed to reach the same carbon budget is much lower in this second case,
illustrating the benefit of exploiting synergies between climate and other sustainable
developmentgoals.
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